Tuesday, November 15, 2011

Face Hard Truths About Social Security

Read the column here (21 August 2011).

These two letters to the editor from back in 2005 formed the starting point for my recent forays into the murky world of Social Security:

Social Security provides no guarantee of income

Social Security Trust Funs is merely a fiscal fiction

The federal bureaucracy sources used in the column:

Social Security Administration Trust Fund Operations

Social Security Trustees 2011 Annual Report Summary

OMB Analytical Perspective FY 2000 Budget

Some additional thoughts in no particular order:

From 1937 through 1958, Social Security ran surpluses every year. Form 1959 through 1981, it ran deficits in eleven years (1959, 1961, 1962, 1965, 1975, 1976, 1977, 1978, 1979, 1980, and 1981). It ran surpluses every year from 1982 through 2009 (it technically ran a surplus in 1982 but borrowed from Hospital Insurance Trust Fund, repaying the money in 1985 and 1986 - see below). Those surpluses peaked in 2007 and dropped in 2008 and 2009. The system began running what in all probability will be permanent deficits in 2010.

Just to muddy the waters, be aware that there are several trust funds: Social Security trust funds include the Old Age and Survivors Insurance Trust Fund (OASI) and the Disability Insurance Fund (DI); the term “Social Security Trust Fund” usually refers to a combination of the OASI and DI funds (OASDI). Medicare trust funds include the Hospital Insurance Trust Fund (HI; Medicare Part A) and the Supplementary Medical Insurance trust Fund (SMI; Medicare Part B and Part D).

Social Security benefits were exempt from the federal government’s taxation of income from the inception of the system in 1935 until a 1983 amendment to the Social Security Act specified that taxpayers who had income above a specified threshold would be subject to income tax on 50% of their Social Security benefits. The amount of Social Security benefit subject to income tax rose to 85% under the 1993 Omnibus Budget Reconciliation Act.

From what I could piece together from various sources, it appears that from the time federal accounting practices changed under the Johnson administration until some time during the Reagan presidency, the Trust Fund contained real bonds; from that time during the Reagan administration until some time in the Clinton administration the Trust Fund contained a mixture of real and “special issue” bonds; since that time during the Clinton administration, the Trust Fund has contained nothing but the “special issue bonds. I could not independently verify this timeline so I did not include it in the column but, given my knowledge of what happened and when with regard to the Trust Fund, it seems reasonable.

Even the amount of money ostensibly in the Social Security Trust Fund is nothing more than an educated guess (perhaps a better word term be “balance,” as there is no actual “money” involved). Each month, the Treasury estimates how much of the government’s aggregate revenue is derived from Social Security payroll taxes and “credits” that amount to the Trust Fund, then subtracts the amount of benefits paid out for the month to arrive at a figure.

Approximately 42% of federal government spending these days is done on the basis of borrowed money. Of that borrowed money, something like 70% of all of the bonds sold by the Treasury this year have been bought by the Federal Reserve. I can’t see any good is going to come of this practice.
The manner in which the term “national debt” is typically used includes intergovernmental debt, which is what one part of the government owes another; the more useful term “publicly held debt” does not. To those outside of the government, what it owes to itself is irrelevant. The important figure is what does government owe to others.

This discussion does not touch on the matter of the “net-present value” calculations that the Social Security Board of Trustees must by law consider annually for the upcoming 75 year period. This is where the discussion of “unfunded” Social Security benefits begins. When the special issue bonds in the Trust Fund are projected to be totally depleted in 2036 (even that year is suspect, as stagnant economic growth and a shrinking base of taxpayer will further hamstring the system), projections are that the system will be lacking funds to pay the full amount of promised benefits to the tune of trillions upon trillions of dollars (projections vary widely, but all involve an absolutely tremendous amount of money). Regardless of the specific amount involved, a projected 27% across the board decrease in benefits will have to occur to keep the system creaking along. Note that this is money that, were it deposited into the system today, would be needed to cover projected benefits over and above the payroll taxed collected over the period and is irrespective of the mythical solvency of the Trust Fund.

And finally, as bad as the finances for Social Security are, those for Medicare are far, far, far worse. For just how bad, see the Social Security and Medicare Boards of Trustees report for 2011.

By the way, the Social Security Trust Fund is currently "credited" with approximately $2.6 trillion in those "special issue" bonds.

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